Beating a Market Gone Mad

The internet is an infernal contraption. It delivers on just enough of its promise to keep us all searching and clicking.

Most times, I guess, people want directions, a sale, or that funny video.

I write a lot about all things economic. History is vitally important for this. Numbers, trends — these never make sense in isolation. They only make sense if you can see where they've been and what else was going on at the time.

Good luck finding search terms for actual research.

Just for fun, I googled "average household income." The very first result was "Median Household Income for Baltimore."

Of course, Google has planted something like 45,000 cookies on my laptop, so it knows I live in Baltimore. And I clearly said "average," not "median."

For the final insult, the second result was dated November 24... 2016.

Welcome to The Internet, As Imagined by Google (trademarked, patent-pending, any unauthorized use blah-blah-blah).

You won't do much better using Google to search for good stocks to invest in. Oh, you'll get results. But they may not be particularly good results, because all those results you get are more concerned with getting picked up by Google than actually finding good stocks.

It truly feels like Google is deliberately trying to give me bad results so I'll give up trying to do anything useful and just go shopping. Now, it seems likely that Google will end up getting regulated right into a breakup of the company because of its insolence (and bad search results).

Will that help the plight of the individual investor? Probably not much...

The Rise of the Index Fund

You'd think the internet would make stock research a more rewarding experience. But good research on individual stocks is getting harder and harder to come by.

It's probably no coincidence that as individual investors have a tougher time getting the good stuff, index funds seem like a good alternative. And they are, really. Except for the fact that you will never beat the market with an index fund.

Right now, in The Wealth Advisory portfolio, we've got a 500% winner, a couple 300% winners, and four positions up over 200%. I'm not telling you this to brag. The point is fewer and fewer analysts are picking stocks. It's a dying skill.

What that also means is that as people pile into S&P 500 funds, these stocks are getting bid up to some pretty lofty levels. The trailing P/E on the S&P 500 is at 10-year highs. And that's not the only valuation that is high. Price-to-book value and price-to-sales are both at their highest level since 2000.

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Does that mean it's all going to come tumbling down? Nope. Fact is, much of the reason valuations are high is the current trade war with China. That's pushed manufacturing to a virtual standstill. And companies that do business with China, like semiconductor companies, have lowered earnings estimates.

If a deal can get done somewhat soon, this market could really roll, because consumer spending has remained strong and the housing market is looking really good, too. That's a big reason stocks have held tough through these trade negotiations...

Undiscovered Gems

The other thing the rise of the index fund has done is make it so there are stocks out there that have solid growth, strong fundamentals, and are just ridiculously low stock prices.

Jason and I have a few such stocks in The Wealth Advisory portfolio. One of them is a real estate developer that has a trailing P/E of about 2.5. It has been solidly profitable for four years running. And it pays a fat dividend: 9.5%.

Sometimes big dividends are a warning sign. Not for this company. The payout ratio for the sweet 9.5% is 18%. That means 18% of profits go to paying the dividend. That is very low, and it means the dividend is very stable. In fact, the company could double that dividend payment and it would have no trouble paying it.

This company does $2.5 billion in annual revenue. And the market says it is worth $250 million. This makes no sense. It's just $4 a share. At some point, this stock becomes a market beater. Until then, there's that 9.5% dividend to keep us happy.

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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